Impact of investment horizon on currency portfolio diversification

Gordon Y. N. Tang

International Business Review, 1996, vol. 5, issue 1, 99-116

Abstract: International managers need to manage foreign exchange rate risks effectively in order to maximize the value of the firm. Modern portfolio theory suggests that exchange rate risks can be reduced through currency portfolio diversification. However, little attention has been paid in the literature to the impact of different investment horizons on the effectiveness of currency portfolio diversification. The information is important to international managers in planning their future holding intervals of currency portfolios. This paper provides empirical results on this topic using 13 countries' exchange prices as to the Hong Kong dollar. Our results show that with an increase in the investment horizon, the correlations between currency returns increase in general, causing the benefits of diversification to decrease. The results suggest that a delayed adjustment pattern exists among different currencies; however, the patterns are different for different currencies.

Keywords: Investment; Horizon; Currency; Portfolio; Diversification (search for similar items in EconPapers)
Date: 1996
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